States have many answers, few standards on taxation of drop shipments

One of the most fertile grounds for state tax audit assessments of companies that do business in more than one state is the simple drop shipment. A simple business transaction, the drop shipment can become a nightmare of complexity from a sales and use tax standpoint. Many states, hungry for revenue, will hold a drop shipper responsible for taxes on items shipped into their jurisdiction even if the actual seller is not required to collect taxes on that sale. Some states require that manufacturers and distributors remit tax on the sale price of the drop shipped items—information the drop shipper may not be privy to since its customer made the actual sale and is not likely to want the manufacturer or distributor to know what it is selling items for. Into these murky waters CCH’s editors for Sales & Use Tax Alert waded with noted sales tax expert Diane Yetter. Together, they created and compiled a survey of states using specific scenarios to learn what the exact policy of states would be on drop shipments. The scenarios were chosen for their real-world nature and all of the answers were reviewed by Yetter and, in some cases sent back for clarification by the states. In the August 1 issue of Sales & Use Tax Alert, CCH’s editors provide an executive summary of the results of this survey, which is printed in full in the new book from CCH, Drop Shipments: Taxation, Compliance and Planning.

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This story is from the CCH’s monthly Focus on Tax newsletter, which provides advise and guidance on federal and state tax issues for tax and accounting professionals.

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